Private Sector Looks to Measure Impact of Opportunity Zones

Investors who want to make a positive social or environmental impact while earning a financial return would seem naturally drawn to investing in “opportunity zones,” low-income areas throughout the U.S. designated by governors in each state as in need of economic development.

But the regulatory language outlining practices for investing in these 8,700 zones offers no assurance to investors or community members that funds investing in these economically distressed areas—known as Qualified Opportunity Zone, or QOZ, funds—will have that kind of positive impact.

Philanthropists, wealth managers, and nonprofits are stepping into the void. Earlier this month, the U.S. Impact Investing Alliance and the Beeck Center for Social Impact and Innovation at Georgetown University, announced a voluntary reporting framework that offers best practices for fund managers and investors. It was written with input from more than 30 contributors, including academics, foundations, investors, asset managers, and community stakeholders.

Opportunity zones are “a once in a generation opportunity to drive very needed capital to America's distressed communities,” says Fran Seegull, executive director of the alliance. But, Seegull says, “this policy will only meet its objective of achieving positive economic and social outcomes for these communities if we understand where funds are flowing and how that capital is helping drive positive social and economic change.”

The problem for investors who want to grab these tax savings is that many of the guidelines for investing in QOZ funds are unclear. Specifically, the current regulations make it difficult to invest in businesses located in designated areas, and they make it difficult to invest in multi-asset funds.

These and other issues have been brought to the attention of the U.S. Treasury, through public comment letters and at an Internal Revenue Service hearing earlier this month. According to Seegull, Treasury is expected to issue further clarity on a range of issues via a series of regulations over this year and next.

It’s unknown, however, whether the IRS will address some of the issues raised by impact investors to ensure that the guidelines meet what Seegull says was the intent of the legislation. Specifically, the alliance, at minimum, wants QOZ funds to be required to provide basic QOZ fund and market-level data, including the amount of assets raised and where they’re being deployed.

“We believe the addition of some of these annual reporting metrics will give us a better feel for where money is flowing, it will aid in capital formation for fund managers, and it will also aid communities to understand where capital is flowing and what the intentions are,” Seegull says. “Over time, we believe that this kind of data is necessary to ascertain the effectiveness of the policy itself.”

The alliance argues that Treasury has the authority to collect transaction data. But Steve Glickman, the former CEO of the Economic Innovation Group, which helped develop the QOZ concept, says the core reporting requirements that were in the original proposed legislation were stripped out of the 2017 tax act, because the U.S. Senate took out all language that wasn’t related to budgetary issues.

“It was deemed those reporting requirements were not relevant—it wasn’t a political or substantive decision, it was a procedural decision,” Glickman says.

Adding reporting requirements would require additional legislation at the federal level, or legislation by states or localities, collectively or individually, he adds. Or, the philanthropic and private sector can step in to create the additional infrastructure, as many are working to do.

Glickman cautions, however, that the purpose of the Opportunity Zone legislation was to stimulate market-based activity in low-income, high-poverty areas, and to sustain that activity with incentives for long-term investment in communities that otherwise would have been ignored.

It wasn’t meant to only fit the parameters of impact investing, “a segment of the marketplace, and a potentially really important one,” Glickman says. “But almost, for sure, a minority of the type of investment being done.”

Still, a robust effort on the part of philanthropists and other private-sector actors—such as the voluntary reporting framework—is an effort to ensure that the communities served by QOZ funds achieve real results.

“It will be incumbent on private sector players, whether developers, the private equity investors, and ourselves as allocators and investors, to ensure that we’re delivering both returns that make sense for investors—that’s partly why they are allocating capital here—and that the investments that are made actually take the needs of communities and local stakeholders into account,” says Andrew Lee, head of sustainable and impact investing, Americas, in the chief investment office at UBS Global Wealth Management. “That is the challenge, to make sure everybody is focused on that.”

The Rockefeller and Kresge Foundations are seeking to support fund managers who can demonstrate their intent to “ensure positive outcomes” in the designated communities with grant capital. The Beeck Center, meanwhile, is creating an Opportunity Zone council of potential investors committed to adopting the voluntary reporting framework.

“We’re really hoping this impact framework helps people get very clear on intentionality, helps measure the social outcomes that are desired and can be used as a real tool to drive capital in meaningful ways into these areas,” says Jennifer Collins, fellow in residence at the Beeck Center.